Our analysis shows different paths of labor market reforms. It makes sense to differentiate between three groups of countries: on the one hand, we have European welfare states with a low initial level of labor market regulation which was not reduced further. These countries concentrated on implementing stricter activation policies with active elements, appear- ing rather late in the UK with the shift to New Labor’s “New Deals” and in Switzerland where active programs were designed according to OECD blueprints. In contrast, Denmark ‘activated’ its full-blown system of active labor market policy in the early nineties. However, whereas in the United Kingdom modest benefits were cut, they were kept intact in Denmark and in Switzerland. All countries belonging to this cluster now combine liberal labor market regulation with intense activation - but in contrast to ‘liberal’ UK, the ‘hybrid’ countries Denmark and Switzerland still provide a gener- ous level of unemployment benefits if the unemployed comply with the requirements imposed upon them. As regards resulting labor market per-
formance, this setting turns out to be a favorable one in terms of achiev- ing and maintaining low unemployment and long-term unemployment, although employment growth – at a high level of employment – was less impressive. The specific lesson we can draw from the Danish and Swiss example is that of the positive effects of low employment protection on the dynamism of the labor market. If a liberal regime of employment pro- tection is combined with institutions that support income and reemploy- ment security, one can obtain a well-functioning employment system without dismantling the welfare state.
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The third group consists of the countries that had a high level of EPL at the outset, i.e. the countries in continental and Southern Europe (the Netherlands, Germany and Spain) but also Sweden. Initial reforms of EPL in the eighties and early nineties increased flexibility at the margin through lifting restrictions on fixed-term contracts and temporary agency work in order to create additional flexible jobs and increase overall labor market flexibility. However, at that point in time, individual dismissal pro- tection applicable to regular jobs was left untouched. The next wave of reforms raised the level of job protection for workers in flexible jobs while moderately reducing the level of individual dismissal protection. This can be interpreted as a reaction to strong growth of the flexible segment and increasingly dual character of these labor markets. Nevertheless, labor market insiders were not affected by considerable deregulation. Transi- tions between the margin and the core of the labor market are still more difficult than in other countries.
With respect to labor market policy, these countries followed similar paths. The common policy shift from costly but fairly passive labor market policies to stricter activation was implemented quite early in the mid- nineties in the Netherlands and about a decade later in Germany and Sweden. Benefits for the unemployed were essentially left untouched in the Netherlands. Transfers to the German long-term unemployed were reduced recently, whereas in Sweden benefit duration was expanded with benefit levels being cut slightly. In Spain, an expansion of benefits in the 1980s was followed by benefit cuts in the early nineties. So we see con- vergence towards activation policies with stricter monitoring of jobs
search, more frequent sanctions and more restrictive availability criteria, but no significant reductions of benefit levels. Since less permissive bene- fit systems make receipt of income out of work less convenient, job- seekers tend to make concessions regarding the wage level of jobs of- fered. However, even though EPL was eased over the last decade, flexibil- ity of the labor market is so insufficient in these countries that the poten- tial for the creation of additional jobs available for ‘activated’ jobseekers is still limited.
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Our analysis could not provide clear-cut evidence on strategic policy- making using political and economic complementarities between labor market regulation and labor market policies in the sense of a close se- quential or simultaneous coupling. But in a longer-term perspective we can see that countries with strong social partner institutions benefit from their capacity to identify needs for reform and to agree on appropriate remedy. ‘Liberal’ welfare regimes have strong built-in labor market adaptability due to the strength of market forces as both EPL and unemployment benefits are weak. Increasing labor market adaptability is a more urgent need for Scandinavian, continental and southern welfare states with stronger employment protection and/or more generous unem- ployment benefits. With hindsight we can argue that those countries were more successful in creating a more adaptable labor market, that could rely on effective capacities to manage policy complementarities: during the decisive years under scrutiny, in Denmark and the Netherlands, there was a strong political leadership that could mobilize societal support and rely on cooperative social partner relations and influential policy advice. This does not mean, however, that all reforms were implemented smoothly. Regarding Switzerland we can point at a strong consociational system. However, taking a closer look at “successful” models we can see that they rely on preconditions which are not easily transferable. Low EPL in combi- nation with high benefit levels constitutes the Danish flexibility-security nexus, which in its current version has already been in place since the late 1960s apart from the recent emphasis on activation. Such a system is easier to achieve if countries never introduced strict EPL, which is hard to abolish later on. The same holds for the ‘hybrid’ Swiss model where pre-
existing ‘liberal’ EPL was supplemented by unemployment benefits and effective activation consistent with OECD recommendations. This was fa- cilitated by the virtual absence of labor market policies prior to this re- form. In contrast to these experiences, acceptance of a more flexible re- gime of labor market regulation and a strict activation strategy accompa- nied by benefit cuts remains a delicate issue in continental and southern European countries. Here the demand for capacities to manage policy complementarities is most pronounced since labor market insiders benefit from the status quo and can oppose policies that imply short-term losses for them. Thus, policy makers have to design packages that are feasible in political terms. And successful settings might erode as is shown by the most recent developments in the Netherlands.